Tag Archives: 144 opinion letter

No. An experienced securities attorney cannot issue a Rule 144 legal opinion or Section 4(a)(1) opinion letter without the Shareholder providing the documentation necessary to show the origin and history of the Shares. (If any documents are missing, an experienced Rule 144 lawyer can help confirm the transaction details by emails with the Issuer and Transfer Agent, when necessary.)

What Documents are Necessary for a Rule 144 or Section 4(a)(1) Legal Opinion?

The amount of shareholder documentation needed depends on whether or not the Issuer is an SEC filer and if the Shares are referenced in SEC filings or OTC Markets disclosure statements.

The best documentation in support of a Rule 144 legal opinion letter would be the Shareholder and the Shares referenced specifically in one or more SEC filings or OTC Markets filings.

If not, then the Shareholder can provide the following documents in support of a legal opinion letter issued under Rule 144 or Section 4(a)(1):

Documentation for Rule 144 Shares Issued Under Subscription Agreement

A copy of the Subscription Agreement signed by the Shareholder and the Company;

A copy of the Private Placement Memorandum (“PPM”), if available;

A copy of the Investor Questionnaire or other correspondence that came with the Subscription Agreement, if available;

A certificate or book entry confirmation from the Transfer Agent showing the Shares issued to the Shareholder; and

Proof of Payment for the Shares, which is usually a check or wire transfer confirmation.

Documentation for Rule 144 Shares Issued for Services

A copy of the Consulting Agreement or other contract showing the services to be performed and compensation; and

Invoices or other correspondence documenting the services;

Board Resolution or Issuance Instructions showing the Shares issued for services; and

A certificate or book entry confirmation from the Transfer Agent showing the Shares issued to the Shareholder.

Documentation for Rule 144 Shares Due to Debt Conversion

A copy of the Promissory Note;

If the Note was issued as payment for services, then also provide the invoices or agreement demonstrating the services rendered to the Company;

If the Note was issued for a loan, then also provide the check or wire transfer confirmation showing Proof of Payment;

Conversion Notice showing the Date of Conversion;

Board Resolution or Issuance Instructions showing the Shares, (if they have already been issued); and

A certificate or book entry confirmation from the Transfer Agent showing the Shares issued to the Shareholder (if they Shares have already been issued).

Shareholders Can Contact Securities Attorney Matt Stout for questions about Rule 144 legal opinions and Section 4(a)(1) opinions any time. Shareholders ready for a no cost review of their documentation can call (410) 429-7076 or send an email to mstout@otlawyers.com.

OTC Markets microcap companies are often former shells. Unfortunately for their shareholders, Rule 144 opinion letters cannot be used to clear stock for former blank check shells unless the Issuer is an SEC filer and meets the requirements of the Evergreen Rule.

However, an experienced securities lawyer may have other options under Section 4(a)(1).

A blank check company or “blank check shell” is a development stage company that has

no specific business plan or purpose or

has indicated its business plan is to engage in a merger or acquisition with an unidentified company.

These blank check companies are also commonly known as “419 shells” or “Form 10 shells.”

The Evergreen Rule in Layman’s Terms

Even once these companies do merge with an operating business, they are forever known as “former shells” and Rule 144 opinions can only be issued under certain circumstances under the “Evergreen Rule.”

The Evergreen Rule basically means that unless an Issuer is an SEC filer, and has filed “Form 10 Information” including audited financials for one year post shell status, and is current in its SEC filings, Rule 144 can never be used. As soon as a former shell becomes delinquent in its SEC filings, Rule 144 is not an option.

Unless the Evergreen Rule is satisfied, the SEC does not allow shareholders of former 419 shells to use use Rule 144 as an exemption from the registration requirements when selling stock.

Section 4(a)(1) May Be Used to Clear Stock of Former Shells

A Section 4(a)(1) legal opinion may be possible if the securities are greater than 2 years old and the Shareholder is not an underwriter or dealer.

A microcap securities attorney familiar with issuing legal opinions for former shells under Section 4(a)(1) can review your documents at no cost to determine if this alternative to Rule 144 can be used.

Under SEC Rule 144, the shareholder’s holding period begins once the shareholder has paid for the restricted stock. In the case of receiving stock in exchange for services, like in a Consulting Agreement, the shares are “paid for” when they are considered “earned” by the Consultant.

A securities lawyer who drafts Rule 144 opinions for shareholders of OTC Markets companies will review many Consulting Agreements which are ambiguous or silent regarding the date on which the shares are considered earned by the Company.

For this reason, consultants who wish to document their proper holding period under Rule 144 should pay close attention to the language in their compensation clause.

In general, it is wise for the Consulting Agreement to specify exactly when the shares are to be considered “fully earned” under Rule 144.

This is especially true when the Consultant is signing an agreement whereby services will be provided on a monthly or annual basis, since it is not always obvious when the shares are earned, or if they are non refundable.

This compensation clause can later be referred to by the securities lawyer, the Transfer Agent, and the Broker, when it comes time to clear stock.

The Securities Act of 1933 (“Securities Act”) requires all sales of securities to be registered with the SEC, unless the transaction is exempt from registration.

Rule 144 Exemptions for Shareholders That are Not Issuers, Dealers or Underwriters

In general, there are provisions in securities law that allow stock sales to be exempt if the Seller is not an Issuer, Dealer, or Underwriter. Rule 144 is just one of those provisions. The term Issuer is self explanatory–this is the public company issuing the stock. Dealer is a “broker-dealer.” Most Shareholders do not have to wonder if they fall into those categories. But under the Securities Act, the term Underwriter does not have to be an investment banking firm–it can include those Shareholders that acquire stock from an Issuer “with a view to distribution.”

Rule 144 Allows a Safe Harbor for Shareholders

The clause “with a view to distribution” is where Rule 144 comes in. SEC Rule 144 allows Shareholders of restricted stock a “safe-harbor” from being treated as an Underwriter as long as the sale complies with all Rule 144 requirements.

Rule 144 Works Due to the Holding Period and Limitations on Affiliate Sales

This works primarily because Rule 144 requires certain holding periods before restricted stock can be sold by Shareholders, making a “distribution” less likely.

Rule 144 also works because Affiliates (Officers, Directors, Control Persons or Shareholders Who Beneficially Own Greater than 10%) who are closest to the Issuer, must file Form 144 whenever they sell securities, and are then subject to trading volume limitations.

Ownership of Securities in Retirement Accounts Does Not Interfere With Rule 144

Many Shareholders of restricted stock choose to transfer their securities into an Individual Retirement Account (“IRA”). This transfer of 144 stock to an IRA will not affect the holding period under Rule 144(d).

The Normal Rule 144 Holding Period Analysis Applies

Even though this isn’t technically a “transfer” in the normal sense of a sale or gift of securities (since it involves the same social security number), the same rationale when it comes to analyzing the Rule 144 holding period applies.

The Same Documentation to Show the Origin and History of the Shares Applies

Issuers Listed on National Stock Exchanges Have Audited Financials

Shareholders of restricted stock in SEC Reporting Issuers such as those traded on national exchanges like the NASDAQ and NYSE MKT do not have to worry about this since all SEC Reporting public companies listed on these stock exchanges are required to submit PCAOB audited financials.

Issuers on the OTC Bulletin Board and OTC Markets OTCQB are Audited

Issuers which are currently quoted on the OTC Bulletin Board or “OTCBB” and the OTC Markets OTCQB and OTCQX marketplaces likewise have audited financials, and if they are shown as “current” on OTC Markets, this satisfies the requirement under Rule 144.

Non Reporting Pink Sheets Do Not Need to Be Audited Under Rule 144

Do the financial statements of non-reporting issuers (OTC Markets Pink Sheets) need to be audited in order to meet the “current public information” requirement under Rule 144(c)(2)?

No. The “current public information” requirement under Rule 144(c)(2) does not require the financial statements of OTC Markets Pink Sheets to be audited since PCAOB audits are not required under Exchange Act Rule 15c2-11(a)(5).

Securities attorneys who have experience in drafting Rule 144 opinions often review Consulting Agreements under which services are performed in exchange for restricted stock in OTC Bulletin Board or OTC Markets public companies.

Consultants are Often Paid in Restricted Stock

Many OTC Bulletin Board or OTC Markets OTCQB, OTCQX or Pink Sheet Issuers use their restricted stock as a type of currency to hire professionals such as attorneys, accountants, and marketing or investor relations Consultants. This makes sense from a balance sheet point of view, as it conserve cash and provides the Consultants with an incentive to help the Issuer, since if the stock price rises, in theory everyone benefits.

The Rule 144 Holding Period Begins When the Consultant’s Fee is Earned

Of the elements of Rule 144, the most important when dealing with a Consulting Agreement is determining the proper “holding period” for restricted stock paid to the Consultant. Under SEC Rule 144, the holding period for restricted stock does not start until the securities have been fully paid for, or fully earned.

Rule 144 Holding Period for SEC Reporting Companies

SEC Reporting Companies such as OTC Bulletin Board (OTCBB), OTC Markets OTCQB, OTCQX and microcap Issuers listed on the NASDAQ or the NYSE MKT exchanges have a holding period of six (6) months.

Rule 144 Holding Period for OTC Markets Pink Sheets

Non Reporting Companies like OTC Markets Pink Sheets generally have a one (1) year holding period for restricted stock, though some would argue that if the Issuer is Pink Current, that it can be said to be fully reporting under the Alternative Reporting Standard. Different broker-dealers and clearing firms have varying opinions on this.

Calculating When the Consultants Rule 144 Holding Period Starts

This sounds simple enough–calculate the Consultant’s holding period under Rule 144 from the day the shares were earned. However, often Consulting Agreements are vague, and provide for a block of shares to be earned in exchange for services provided over a set period of years.

But at what point are all of the shares (or a portion thereof) earned? Is it upon signing the Consulting Agreement….or only at the end of the term? Do the shares get prorated if the Consultant stops performing work before the term ends?

When there is ambiguity, a Rule 144 securities attorney needs to request Board Resolutions, and correspondence between the Issuer and the Consultant so that it is clear when the shares were earned, and when the Rule 144 holding period starts.

Consultants and OTC Issuers can assist securities lawyers drafting Rule 144 opinions by clearly stating in the Consulting Agreement when the shares are fully earned.

A Securities Lawyer Can Draft Consulting Agreements to Comply with Rule 144

Consultants who provide services to microcap public companies in exchange for restricted stock may contact securities lawyer Matt Stout with questions concerning Rule 144 at (410) 429-7076 or find more information on how to structure Consulting Agreements to comply with SEC Rule 144 at OTCLawyers.com.

Shareholders of Current Shells Cannot Use Rule 144 to Clear Stock

Most shareholders already know restricted stock cannot be cleared under SEC Rule 144 if the Issuer is currently a “shell company.”

An Issuer’s Past Shell Status Does Affect How Rule 144 is Applied

Shareholders holding restricted stock in OTC Bulletin Board (OTCBB) and OTC Markets OTCQB and Pink Sheet companies often wonder if the former “shell status” of the Issuer will affect the free trading status of their shares under Rule 144.

Rule 144 Requires Issuers to Be Fully Reporting For 1 Year

Yes, the Issuer’s former shell status is always important when a securities lawyer performs due diligence prior to drafting a Rule 144 opinion letter.

SEC Reporting Companies Have to Be Fully Reporting for 12 Months

This is because Rule 144 requires the Issuer to file all required SEC reports (10-Q, 10-K and 8-K) for at least 12 months after ceasing to be a shell before a shareholder can clear stock under Rule 144, even if all other requirements are met.

Pink Sheets Have to Be Fully Reporting for 1 Year Following Shell Status

OTC Pink Sheets, which do not report to the SEC, must file all of their Quarterly, Annual and Information and Disclosure Statements with OTC Markets for 1 year after ceasing to be a shell before Rule 144 can be used by a Shareholder to clear restricted stock.

144 Opinions Require Detail Regarding Past Shell Status

Rule 144 Opinions drafted by experienced securities lawyers like Matt Stout always go into detail to document the assets and operations in former shell companies.

It is important to demonstrate clearly that the Issuer ceased to be a “shell company” on a certain date, and to show that the proper post-shell reporting has remained current for the required amount of time.

Shareholders holding restricted stock in current or former shell companies can contact Matheau J. W. Stout, securities attorney at (410) 429-7076 with questions and find more information on OTCLawyers.com.

When Can Former Affiliates Sell 144 Stock Without Trading Volume Limits?

Under Rule 144, an ex officer, director, or “control person” of a publicly traded company can sell shares without the trading volume limits after more than than 90 days have elapsed since he or she stopped being an Affiliate.

How Does Someone Cease to Be an Affiliate Under Rule 144?

An Affiliate becomes a “Non Affiliate” by resigning from positions of control within the company. This means he or she resigns as an officer or director.

Of course, Shareholders who own more than 10% of a company’s voting stock are also considered Affiliates under Rule 144, and this status ceases once they have transferred enough stock such that they own less than 10%.

Affiliates Can Document Non Affiliate Status Under Rule 144 With These Documents

This provides the date when the Affiliate resigned….A Letter of Resignation from the position as officer or director;

This shows the Company acknowledged the resignation….A Board of Director’s Resolution accepting the resignation and appointing another officer or director in the Affiliate’s place;

This shows that the information was made public….An OTCMarkets.com or SEC filing such as an 8-Ks or Disclosure that lists the date of the Affiliate’s resignation;

This shows when a Shareholder first owned less than 10%….a stock purchase agreement, stock assignment, or a portion of the Transfer Agent’s shareholder’s list showing when the former Affiliate’s ownership percentage dropped below 10%. This could be due to issuances of stock to others, which raised the issued and outstanding, or due to the former Affiliate’s sale or gift of stock.

Current and former Affiliates can contact securities attorney Matheau J. W. Stout at mstout@otclawyers.com or (410) 429-7076 to discuss how to document non affiliate status under SEC Rule 144.